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Why Gold Slumped; Why It Will Come Back

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK (TheStreet) -- There are two reasons why the gold market, and indeed the entire commodity sector, got stuffed last week.

First, the "counterfeiter in chief," Federal Reserve Chairman Ben Bernanke managed to disappoint the gold market by deciding to sterilize the bond purchases made on the long end of the yield curve.

By offsetting the purchases of short-term Treasuries with sales of shorter duration notes, Bernanke will not increase the supply of money or dilute the currency to a greater extent than he already has in performing Operation Twist.

But make no mistake, the global economy is faltering, and QE3 isn't far off. However, the gold market was expecting the Fed to do more in the way of easing during its latest two-day meeting -- like ceasing to pay interest on excess reserves. Therefore, in the short term, there will be selling pressure on all commodities.

Second -- and this is only conjecture now -- sovereign states in Europe that are flirting with insolvency may have resorted to dumping gold in the open market.

When under duress, these countries are forced to dump what they can. And there just isn't any asset that has performed better in the last dozen years than gold and commodities.

But the good news here is that such selling will move gold from a few weak hands to a widespread group of strong owners. This will be beneficial for gold prices in the long run, and this recent selloff should be a welcome opportunity for investors to accumulate a more substantial position.

The bottom line is that all government "solutions" to a debt crisis in any form are monetization. The European Central Bank will end up recapitalizing European banks.

The shell game over in Europe is about moving insolvent sovereign debt onto a different balance sheet. That solves nothing. Haircuts will be massive, and money printing will make up the difference. That's why gold's retreat will be temporary.

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